In This Week’s JMRD Market Observer
NBFM Monthly Economic Monitor
Cleantech at the tipping point. Green growth is only just the beginning
Pipelines, Utilities & Energy Infrastructure: 2017 outlook
Milestone Investors Push Back on $1.3 Billion Starwood Deal
Reads of the week
NBFM Monthly Economic Monitor – February 2017
- The global economy remains vulnerable due to old problems such as deteriorating demographics, underinvestment and China’s rebalancing, and new ones such as Brexit and a potential trade war. Protectionist policies from the new U.S. administration could not only lead to retaliation from trade partners, and hence overall losses in wealth and efficiency, but also to further appreciation of an already-stretched dollar which would raise odds of defaults worldwide considering record amounts of USD-denominated debt held outside America. There are indeed downside risks to our forecast for world output to grow roughly 3.3% this year.
- U.S. GDP growth should accelerate to more than 2% this year as fiscal stimulus is enacted by new leadership. Such above-potential growth for an economy that is operating close to capacity should allow inflation to hit the Federal Reserve’s target for the first time in five years. But prices are unlikely to get out of control because forces that have kept them under wraps over the past several years, e.g. unfavourable demographics and a strong dollar, will continue to dominate, at least over the near to medium term. The longer term U.S. outlook for both growth and inflation is less clear given that protectionist measures being considered by the Trump administration threaten not just the world economy but America itself.
- Having largely adjusted to the oil shock, Canada now faces a new challenge which could be even harder to overcome. Protectionist measures such as a border adjustment tax, as currently being considered by U.S. leadership, have potential to hurt Canada’s exporters and hence its economy. But until concrete policy measures are approved by the new U.S. administration, we continue to assume common sense will prevail among policymakers as to not materially hurt businesses on both sides of the border. Our growth forecasts for Canada are unchanged for now at 1.9% for this year and 1.7% in 2018.
Sustainability and Cleantech: Cleantech at the tipping point. Green growth is only just beginning
The cost of wind and solar power fell to new records last year. In many places, renewable energy is now cheaper, cleaner and easier than other sources of energy. Forget global warming, economics should drive growth in renewable energy, but also in storage and flexible demand, leading to electrification of the energy economy. Despite rapid growth for the last few years, wind and solar make up only about 3% of global energy supply. In ‘17E, we would bet again on the IPPs, with a strong outlook for growth and demand for contracted infrastructure. We are also bullish on green building technologies and battery materials. Based on return to target and ratings, our top picks for ‘17E are INE, BLX, AQN, LLG, AXY and PEGI.
We own Northland Power and Innergex Renewable Energy in the JMRD Baskets.
2017 outlook: Off the roller coaster, back on the growth train
- Back on the growth train: After a two-year roller coaster ride for the sector (-22% in 2015; +30% in 2016), we expect 2017 capital appreciation will revert back to more normalized performance in line with annual per share growth of ~10% through 2018e.
- Commodity prices and market access (positive): With our long-term WTI assumption of S$60/bbl calling for 15-20% upside still to come, combined with political support now on both sides of the border for market access (TMX, K-XL), we expect continued valuation support across the Pipelines & Midstream space. Meanwhile, despite rising competition from Marcellus/Utica gas supplies into Ontario, we expect a rising sense of producer urgency for accessing U.S. markets to support organic growth opportunities and enhance the value of pipe in the ground (read Alliance).
- Alberta power prices (positive): We forecast 2017e spot prices of $32/MWh, up ~75% from 2016 at $18/MWh, and continue to see upside towards $45/MWh by next decade under the new capacity market design, supporting recent momentum for CPX / TA.
- Potential impact of U.S. tax rate changes on Utilities (negative): Should congress approve a reduced U.S. corporate tax rate of 15% (from 35%), we highlight ~15% downside to U.S.-based utilities AFFO, suggesting ~10% downside risk to our 2018 estimates for both EMA and FTS – i.e., both approximately two-thirds U.S.-based.
- Interest rates & FX (neutral): Although the 10-year GCAN rate is expected to move up ~40 bps to 2.1% by the end of 2017, credits spreads tightened ~70 bps to ~220 bps since mid-2016 – keeping our long-term BBB bond rate assumption in check at 5.5% (3.0% GCAN + 2.5% credit spread). On the FX front, we maintain our long-term outlook of Cdn$1.30, in line with spot and strip levels out to 2020.
- Target/Rating changes + Top Picks: Rolling forward our valuations to 2018e, our targets bump up ~5%, while the only rating change is ENF to SP (from OP), reflecting relative price appreciation since our November upgrade. For screening top picks, we highlight attractive P/AFFO valuations relative to secured growth profiles and payout ratios. Overall, our top picks for 2017 include VSN, TWM, KEY and CPX.
JMRD owns Capital Power, Keyera, Northland Power, Veresen and Innergex Renewable in our Canadian baskets. (Full report attached)
Milestone Investors Push Back on $1.3 Billion Starwood Deal
Article – Milestone Investors Push Back
Daily NBF Bulletin – MST.UN
Reads of the Week
- Hot Charts – World: Emerging markets have room to retaliate against U.S. protectionism Could protectionist U.S. trade policies backfire and hurt America? Sure they can, particularly if they trigger a trade war. As today’s Hot Chart shows, emerging economies, including China, have ample room to retaliate and raise tariffs on their own imports of industrial and agricultural goods from the U.S., without even having to infringe WTO rules. But where America could be hit the hardest is through its currency. An already-stretched U.S. dollar could appreciate even more and potentially hit all-time highs in trade-weighted terms if protectionist policies implemented by the Trump administration have the desired effects of improving the U.S. trade balance and the undesired effects of increasing safe haven flows „Ÿ a trade war could significantly hurt global growth and hence spook investors worldwide. Further USD appreciation would not only cut into U.S. growth but also lower import prices in America, the exact opposite of what the new administration is trying to achieve. See the full article.
- The savings jar doesn’t fill itself: Here are five steps you can take to jump-start your financial success
Monday January 30th – Personal income & PCE
Tuesday January 31st – Agriculture prices
Wednesday February 1st – Manufacturing PMI
Thursday February 2nd – Initial jobless claims
Friday February 3rd – Unemployment rate (opens new window)
Monday January 30th – None
Tuesday January 31st – Imperial Oil Ltd, MasterCard Inc, NASDAQ Inc
Wednesday February 1st – Facebook Inc, Brookfield Infrastructure Partners L.P.
Thursday February 2nd – BCE Inc, Brookfield Renewable Partners L.P., OTC, Saputo Inc.
Friday February 3rd –
Have a good weekend!